Get Rid of Excess Inventory to Maximize Business Price
When selling a business, maintaining proper inventory levels is essential to maximizing value. Don't let poor inventory management drag down the value of your business.
Inventory is an ever-renewing, moving, and perishing thing. The longer it hangs around, the less valuable it gets, and eventually dies as a viable product. If it's not turning over fast enough, the inventory begins to stop-up cash flow and drain capital coffers. Inventory is a dollar-for-dollar part of the buying and selling process and buyers will make a close assessment of it prior to closing a deal.
So, when operating a business, the goal is to tie up as little cash as possible in inventory, while having enough inventory to meet ordinary business needs. And, when selling a business, prospective buyers looking at a business as a possible acquisition would rather see fully flexible cash, not less flexible inventory weighing profits down. Any free cash flow that can be found to help bottom line earnings when selling a business will be rewarded by a higher price when the business is sold.
Regarding the problem of excess inventory, there is a delicate balance where it begins to cost more to carry the inventory than it costs to not carry the inventory. Supporting unneeded inventory can decimate profitability and cash flow in a hurry. Not only does it tie up cash, there are day-in and day-out costs associated with that inventory as well. Whether it be the expense of financing that inventory, the costs of markdowns due to age and obsolescence, the incremental payroll costs of moving it around, or the hidden costs of not being able to merchandise more productive inventory in its place, it all adds up, and hits the bottom line.
The following costs associated with excess inventory affect profitability and impact business value:
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Ask the Experts
What are some of the biggest mistakes business owners make when selling their companies?
This questions pops up a lot. This recent article is excellent and spells it out rather well.
Merger & Acquisition Mistakes to Avoid When Selling a Company
It's oft-repeated that mergers and acquisitions is a buyer's game. In most cases this is true because buyers doing much more buying of companies than sellers do selling. Private equity firms, corporate developers and even family offices tend to buy and sell many more times than individual sellers do. They're often more experienced, more prepared, more strategic and less prone to bring emotion into the process. There are specific ways in which business sellers tend toward hurting their prospects of getting a deal done. In many cases they not only do so at their peril but at the ultimate peril of the sustainability of their companies. Here are a few mistakes sellers make when considering a merger or acquisition of a business.
Crossing the Bridge Twice
Keeping Emotions in Check
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